The government is expected to break Labour’s manifesto pledge not to raise income tax.
The Chancellor, Rachel Reeves, has told the Office for Budget Responsibility (OBR) that she intends to increase personal tax in one of several “major measures” planned for the Budget at the end of the month, according to The Times.
The watchdog will produce an impact assessment of the chancellor’s proposals to be presented to the Treasury on Monday, ahead of the Budget on 26 November.
Lucy Powell, the newly elected Labour deputy leader, has urged the government not to hike taxes at the upcoming Budget, warning that doing so could damage “trust in politics”.
But amid speculation that Ms Reeves is plotting to take the plunge, The Independent takes a look at what her options are when it comes to income tax, and what they could mean for you.
1p increase in 20p tax rate
When Ms Reeves said she is “Chancellor in the world as it is, not the world that I might wish it to be”, some speculated this could mean she is considering the first rise in the basic rate of income tax in half a century.
This would be lucrative, with HM Revenue and Customs (HMRC) modelling showing that changing the basic rate by 1p would raise an additional 6.9bn in 2026/7 and £23.4bn over the following three years.
However, the move would also be highly controversial, impacting each taxpayer differently, depending on how much they earn.
Currently, tax in England, Wales and Northern Ireland (the Scottish parliament sets Scotland’s) should be paid at 20 per cent between £12,571 to £50,270, then 40 per cent £50,271 to £125,140, and 45 per cent over £125,140, with nothing due on earnings under £12,570.
Laura Suter, the director of personal finance at AJ Bell, described adding 1p to the basic rate of tax, so hiking it up from 20 per cent to 21 per cent, would be “the most straightforward option” if the government were looking to increase income tax.
She explained to the Guardian: “That would cost taxpayers up to £377 a year in extra tax, with anyone earning £50,270 or more facing the maximum hit.”
The newspaper’s analysis finds that someone earning the UK’s average income of around £35,000 per year would have to fork out an extra £224 annually if 1p was added to the basic rate.
1p extra on higher and additional rate tax
Ms Reeves insisted last month that those with the “broadest shoulders” should pay more tax, which means targeting taxpayers in the higher income bands cannot be ruled out.
However, this move would bring in less money overall.
According to the HMRC projections, changing the higher rate by 1p would only bring in an additional £1.6bn in 2026/7 and £5.9bn over the following three years.
If 1p was to be added to the additional rate, this would only raise an extra £145m in 2026-27 and £640m over the next three years.
1p added across the board
Ms Reeves has called for “each of us must do our bit”, which could imply that she is considering adding 1p to every rate of tax, with higher earners therefore being hit harder.
Hiking all rates of income tax by 1 percentage point would yield an estimated £11bn a year by 2029/30 – with the bulk of this revenue coming from increasing the basic rate, according to the Institute for Fiscal Studies.
The Guardian’s analysis shows this move would still lead to the average worker bringing in £35,000 a year being charged £224, whereas someone making £55,000 would be forced to pay an additional £424 annually, and people with incomes of £75,000 would pay £624 extra.
‘Two up, two down’ package
The chancellor is said to be considering a 2p rise in income tax and a 2p cut in national insurance, which would cancel out the burden on workers and move it onto other groups, such as landlords and pensioners. The cut to national insurance could be limited to people earning below £50,270 per year, while earnings over the threshold would still be subject to a two per cent rate, The Times reports.
Such a move could generate as much as £6 billion to help repair public finances, according to the Resolution Foundation think tank.
The Guardian’s analysis finds that the average earner making £35,000 each year would not see a difference in the amount of tax they pay. However, Tom Selby, the director of public policy at AJ Bell, told the newspaper a retiree with the same level of income would see a rise in their annual tax bill of nearly £450, while a pensioner with a taxable retirement income of £65,000 would be hit with a tax hike of more than £1,000.
He said the move would enable Ms Reeves to still “claim to be protecting the pay packets of ‘working people’”. “While hitting pensioners in the pocket will clearly be unpopular – particularly in the wake of the winter fuel payment fiasco – it may be viewed as the least bad option,” he added.
Two-year extension on tax thresholds freeze
Personal tax thresholds have been frozen in cash terms for the last three years, even though they are traditionally adjusted to keep up with inflation, resulting in what economists term “fiscal drag” – when people get dragged into paying income tax, or pushed into higher tax bands upon getting a pay rise.
The current freeze was introduced by Rishi Sunak when he was chancellor in 2022, and is meant to expire in 2028, but some believe Ms Reeves might extend it until 2030.
Ade Babatunde, the senior financial planning director at the wealth manager Rathbones, told the Guardian: “It’s taxation by stealth: the rates stay the same, but a bigger slice of your pay disappears into the taxman’s coffers.”
The newspaper reported Rathbones’s analysis shows this policy would leave average earners who were making £35,000 a year in 2022 paying £926 additional tax until the end of the decade, while those with a £50,000 salary would have to fork out £4,632 extra, and people earning £80,000 would end up having to pay £5,635 more.
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